Patent Box Relief for UK Deeptech Companies: Practical steps to prepare, claim and comply

Patent Box Relief: A Guide for UK Deeptech Companies

For UK deeptech companies, the path from initial research to generating revenue is often long and capital-intensive. After years of using grant funding and venture capital to develop groundbreaking technology, reaching profitability is a significant milestone. However, that success introduces a new challenge: a 25% corporation tax bill. To soften this, the UK government provides a powerful incentive. The Patent Box scheme is one of the most important deeptech tax incentives available, as it specifically reduces corporation tax on qualifying profits from 25% to a 10% rate. Understanding how to prepare for it, even years before your first sale, is crucial for maximising your return on innovation.

For a pre-revenue startup focused on R&D, a tax reduction on future profits can feel distant. The immediate financial pressures are about extending your runway, often through R&D tax credits, which provide a cash benefit now. However, the actions you take during this early, pre-profitability stage directly determine your ability to claim Patent Box relief later. The work required to claim R&D tax credits UK and the Patent Box is closely linked; good record-keeping for one provides the foundation for the other.

The key is to think of Patent Box not as a claim to file today, but as a system to build from day one. The data you need to justify your claim must be tracked from the beginning of your R&D. Waiting until you are profitable to try and reconstruct years of development expenditure and IP history is a significant, and often impossible, challenge.

Pillar 1: Meeting the Qualifying IP Requirements

Determining whether your intellectual property meets HMRC’s criteria is the first hurdle. The scheme is specific about what qualifies, and you must satisfy three core conditions.

• You must hold a qualifying patent. The relief applies only to profits generated from patents granted by the UK Intellectual Property Office (UK IPO) or the European Patent Office (EPO). A pending patent application is not sufficient; the relief only applies once the patent has been officially granted.
• You must own or exclusively license the IP. The company claiming the relief must own or hold an exclusive licence to the qualifying patents. This is a common trip-up for university spin-outs or companies where founders initially held the IP personally. The link between the corporate entity and the IP must be formal and legally sound.
• You must meet the development condition. This condition requires the company to have performed the R&D leading to the invention or to have actively managed its development. In practice, this means you cannot simply acquire a patent and benefit from the tax relief. Your company must have been instrumental in its creation, ensuring the incentive rewards genuine UK innovation.

Pillar 2: How to Reduce Corporation Tax on Deeptech Patents in the UK

Once you have qualifying IP, the next challenge is calculating which portion of your profits is eligible for the reduced 10% rate. This involves isolating the profits from your intellectual property from your general business profits, which is the essence of the "box." This calculation involves a few key steps.

1. Identify Relevant IP Income (RIPI). This is the starting point and includes worldwide income from sales of products incorporating the patented invention, licensing fees, and infringement damages.
2. Deduct routine profit. From your RIPI, you must deduct costs and a 'routine return' to remove the profit your business would have made anyway without the patent. This isolates the profit that is specifically attributable to your unique IP.
3. Apply the Nexus Fraction. The final step is to apply the R&D Nexus Fraction. This calculation ensures the tax benefit is proportional to the amount of R&D your company performed itself in the UK. “The Nexus Fraction formula is: (Direct R&D Spend * 1.3) / Total R&D Spend (including IP acquisition costs).” The 1.3x multiplier provides a small uplift, but if you acquired the IP instead of developing it, your fraction will be lower, reducing the benefit.

Consider a UK deeptech startup with £400,000 in total profit. Of this, it identifies £150,000 as profit attributable to its patented technology. All R&D was done in-house, so its Nexus Fraction is 100%. The standard corporation tax on that profit would be £150,000 * 25% = £37,500. With Patent Box, the tax is £150,000 * 10% = £15,000, creating a tax saving of £22,500.

Pillar 3: Making the Election and Maintaining Compliance

Meeting the administrative requirements is the final pillar. A company does not automatically receive Patent Box relief; you must formally elect into the scheme. A scenario we repeatedly see is companies missing the window to claim. “The deadline to elect into the Patent Box scheme is two years from the end of the accounting period for which the claim is being made.” This is a strict deadline that, if missed, results in losing the relief for that period entirely.

While you do not submit all your calculations with your tax return, you must maintain meticulous records to support your claim in case of an HMRC enquiry. This documentation should clearly link your R&D expenditure, tracked in systems like Xero, to specific IP assets and show a transparent calculation of the qualifying profits. One of the most valuable aspects of the scheme is that “Retrospective claims can be made for the period a patent was pending, once it has been granted.” This allows you to claim relief on profits earned while you were waiting for approval, but it is only possible if you have kept detailed, contemporaneous records throughout that entire waiting period. Without them, the opportunity is lost.

Practical Steps to Prepare for Patent Box Relief

The reality for most deeptech startups is that day-to-day survival, product development, and fundraising take precedence over long-term tax planning for IP tax benefits. You may be more focused on immediate investor incentives such as SEIS/EIS. However, a few pragmatic steps today can ensure you do not forfeit the significant financial benefits of Patent Box later on.

1. Track R&D expenditure by project now. Even if you are pre-revenue, use tags or tracking categories in your accounting software to associate costs with the specific technology or potential IP asset they relate to. This data is essential for both your immediate R&D tax credit claims and the future Nexus Fraction calculation.
2. Formalise your IP ownership immediately. If a patent is held by a founder, a university, or another entity, work with a solicitor to execute a formal assignment or an exclusive licence agreement to the company. As advisors at Grant Thornton note, this single piece of paperwork can be the difference between a successful claim and a complete disqualification.
3. Recognise the synergy with R&D Tax Credits. The detailed project accounting required to submit a robust R&D tax credit claim is precisely the same information needed to calculate the Nexus Fraction for Patent Box. A strong process for one is the foundation for the other, making both claims more efficient and defensible.
4. Set a reminder for the election deadline. Once a key patent is granted, put a recurring reminder in your calendar for the two-year election deadline and inform your accountant. You do not need to be a tax expert, but flagging the event ensures the conversation happens at the right time, securing one of the most important IP tax benefits UK deeptech firms can receive.

Frequently Asked Questions

Q: Can a company claim both R&D tax credits and Patent Box relief?

A: Yes, and they are designed to work together. You can claim R&D tax credits for the expenditure incurred while developing the IP. Later, once the patent is granted and you are generating profits from it, you can elect into the Patent Box scheme to reduce the corporation tax on those profits.

Q: What happens if my patent application is rejected?

A: If a patent application is ultimately rejected, you cannot claim Patent Box relief on any profits related to that specific invention. The scheme's benefits are contingent on a patent being officially granted by the UK IPO or EPO. This makes a robust patent strategy essential for deeptech tax planning.

Q: Do I need a specialist advisor to make a Patent Box claim?

A: While not mandatory, it is highly recommended. The calculations for isolating qualifying profits and applying the Nexus Fraction are complex and require careful interpretation of HMRC guidance. A specialist can help ensure your claim is maximised, compliant, and defensible in the event of an enquiry, avoiding costly mistakes.